DALLAS -- Fleming here said last week volume from Kmart Corp. will be a net addition to the distributor's 2002 results, regardless of how Kmart proceeds with its financial reorganization.
"It's just a question of how much net addition," Neil Rider, executive vice president and chief financial officer, told securities analysts during a conference call following the release of Fleming's results for the year and fourth quarter ended Dec. 30, 2001, which showed increased sales and earnings.
According to Rider, Kmart accounted for $1.4 billion worth of business for Fleming in 2000 and $3.1 billion in 2001, "and though it will likely not reach the $4.5 billion we had anticipated in 2002, we have a lot of trouble seeing any scenario where we don't see revenues in excess of the $3.1 billion we saw last year, which will mean there will still be incremental growth from Kmart for the full year."
He also said he expects Kmart to contribute to an increase in the distributor's operating cash flow, noting that Kmart's contribution last year to earnings before interest, taxes, depreciation and amortization was about $10 million -- "not a very significant amount." "We had originally anticipated the Kmart contract would bring us up to $60 million of EBITDA growth, including $40 million this year. However, we now think that number could hit $30 million or $35 million this year, which would be significant growth over 2001.
Mark S. Hansen, chairman, president and chief executive officer, told analysts Fleming does not anticipate closing any distribution centers, regardless of what Kmart does.
Fleming opened two additional distribution centers -- in Fort Wayne, Ind., and South Brunswick, N.J. -- to accommodate the Kmart business, Hansen said, "and they are two of our five best-operating divisions in terms of efficiency and throughput volume.
"Our original plan was to open those facilities to support Kmart, and then build sales beyond Kmart because Fort Wayne gives us good opportunities to address customers in the lower peninsula of Michigan, Indiana, western Ohio and the Chicago market, while South Brunswick is in an enormous population center that includes southwest New England, eastern Pennsylvania and metropolitan New York.
"So based on any knowledge we have now, we don't foresee any facility closures, but we do see opportunities to continue to add non-Kmart volume to use those spaces effectively."
Hansen also said Fleming would consider forming alliances similar to the one it has with Kmart as it seeks additional sales growth. "We believe we could duplicate that arrangement with an alliance or two with other large-scale retailers."
Sales at Fleming rose 10.3% to $15.6 billion for the year and 19.1% to $4 billion for the fourth quarter, after adjustments for a 53rd week in fiscal 2001 and a 13th week in last year's fourth quarter.
Net-income results were adjusted to exclude: a net fourth-quarter charge of $11.9 million, or 23 cents per share, for the Kmart bankruptcy; and a $5.3 million pretax charge for Fleming's strategic plan, which involved the closing and selling of conventional retail stores over the past three years to concentrate on price-impact formats.
Excluding those charges, net income for the year rose 53.4% to $93.5 million -- the highest earnings level since 1993, Fleming indicated -- or $2 per share. With the charges included, net income for the year was $23.3 million, or 52 cents per share, compared with a loss of $122.1 million a year ago.
For the fourth quarter, adjusted net income rose 59.1% to $31.1 million, or 64 cents per share. Including the charges, net income was $5.7 million, or 12 cents per share, compared with a loss of $37.4 million a year ago.
Sales in Fleming's distribution segment rose 21.2% to $13.3 billion for the year and 31% to $3.5 billion for the quarter.
"While the Kmart alliance added significantly to our distribution business, what is even more meaningful is the growth we achieved with the rest of our customer base," Hansen said. Excluding Kmart, distribution sales rose 6.5% for the year and 5.2% for the quarter -- "the third year of sales growth in what's considered a non-growth space," Hansen noted -- through acquisitions, plus growth among Fleming's Top 25 customers.
In the retail segment, Fleming said the closing of conventional supermarkets resulted in a sales drop of 26.6% to $2.4 billion for the year and 25.8% to $520 million for the quarter. Fleming operated 116 stores at the end of 2001 -- including 99 Food 4 Less and Rainbow price-impact stores and 17 Yes!Less limited assortment stores -- compared with 187 a year earlier.
Hansen said Fleming is investing in its corporate-store base with an aggressive remodeling program designed to expand departments and categories that drive sales and margins without the addition of service or labor, including: more self-service offerings in bakeries and delis; the addition of linear footage to frozen foods; and the expansion of beer, wine and liquor selections.
Comparable-store sales in the retail segment rose 0.7% for the quarter. Excluding stores that were undergoing remodeling, comps for the quarter were up 1.8%.
Bill Marquard, executive vice president, business development, said it's premature to speculate on whether Fleming or Kmart will seek to make any changes in their supply agreement, although he noted that Kmart would face many structural impediments if it decided to use sources of supply other than Fleming.
"Fleming products represent 12% to 15% of Kmart's sales base, with food and consumables [being] a significant driver of traffic, particularly at the supercenters," Marquard said. "So if Kmart were to decide to redirect its supply efforts to another company, that would put them back where they were three or four years ago, and no one [other than Fleming] has the national footprint to serve them.
"And if Kmart decided to bring distribution in-house, it would require an investment of $150 million, and with the company in Chapter 11, where every dollar must drive the growth of the business, it's highly unlikely they would devote capital to that when they already have a supply arrangement in place."
Fleming's business with Target Stores has more than doubled in the past year, Hansen said, "and we anticipate strong, additional growth as Target adds more supercenters," including 12 Super Targets during the first quarter.
He said Fleming supplies 47 of 62 Super Targets -- 26 stores with all their inventory and 21 stores with only part of their inventory.
Convenience stores accounted for 14% of Fleming's revenues last year, compared with 6% in 1998, Hansen noted.